Week 7: intro to tax Flashcards
Define tax?
“Taxes are contributions levied on persons, property or businesses for the support the national or local government”
What are six reasons for tax?
1) To provide public goods which are unlikely to be provided by market e.g. defence and law & order
2) Redistribution of income and wealth
3) Promote social and economic welfare by proving merit goods like education and discourage demerit goods like alcohol
4) Economic stability
5) regulation
6) Harmony with trading partners
What are the three main UK taxe basis?
3 Main bases in UK tax at present :
- Income e.g., Income Tax (IT) & Corporation Tax(CT)
- Capital e.g., Capital Gains Tax (CGT) & Inheritance Tax
- Consumption e.g., Value Added Tax (VAT) & Excise Duties
what are direct and indirect taxes?
direct taxes are levied directly on person whi is intended to pay tax. either collected at source eg PAYE or by direct self assesment
indirect is borne by a person other than one from whom tax is collected
explain the difference of by unit vs ad valorem (by value) tax?
unit tax is levied by volume on what is being taxed e.g weight of tabbacoo
while ad valorem is levied on the value of tax base (e.g income tax)
what are the three types of uk tax payer?
Individuals:
Income Tax, Capital Gains Tax, Inheritance Tax, National Insurance Contributions
Corporations:
Corporation Tax (instead of Income Tax)
Corporation Tax on chargeable gains instead of Capital Gains Tax
Both:
Value Added Tax, Customs Duty, Excise, Insurance Premium, Stamp Duty, Local taxes
what is income tax and where is the income cominng from?
Income tax are Taxes on a taxpayer’s income earned or received between specific points in time
Charged on income from:
property (rents)
investments (interest and dividends)
businesses (profits)
employment (wages and salaries)
what are Income taxes for companies called ?
Income taxes for companies are called corporate tax
what are Income taxes for individuals called?
Income taxes for individuals are called personal taxes
What are the main cetgroies of wealth/capital taxes?
Taxes on accumulated taxpayer’s wealth
Categories:
- CGT
- Inheritance tax
- Stamp duty
- Council tax
what is HRMC and the “department of work & pensions” worth?
HRMC collects taxes and national insurance contributions
department of work and pensions determines entitlement to benefits and pays out benefits
what is the progressive tax system?
the progressive tax system is where tax represents an increasing portion as the value of the tax basis rises.
what where adam smiths canons of taxation?
Equity, certainty, Convenience & effeciency
Equity:
“The subject of every state ought to contribute to the support of the government in proportion to their respective abilities (revenue) which they respectively enjoy under the protection of the state”
Certainty:
“The tax which each individual is bound to pay ought to be certain and not arbitrary”
Convenience
“Every tax ought to be levied at the time , or in the manner, most convenient for the contributor to pay it” (Economy in collection and Convenience in payment)
Efficiency
“Every tax ought to be so contrived as both to take out and keep out of pockets of the people as little as possible over and above what it brings into the public treasury of the state”
There was no income tax in UK in 18th century.
what is horizontal equity?
horizontal equity is where all taxpayers with equal tax capcity bear the same tax burden
what is vertical equity?
vertical equity is a tax system if those with a greater tax capacity bear a higher tax burden
what is the income effect?
Income distortion by increasing income tax
Reduction in the amount that the taxpayer can consume
Positively
more effort, work harder, better investment
Negatively
Effects on leisure decision, personal (work less ) and investment choices
what is a substitution effect?
substitution effects:
excess tax burden arises when individuals consume more o fone item rather than anothers
petrol taces have more effect on petrol consumption and less effect on miles driven in the long run
what is certainty?
Should not be arbitrary ( not changeable)
Complete tax consequences should be known in advance of the transaction being undertaken.
What’s the tax liability?
When and where to pay it?
what is convenience?
Administration Cost:
Costs that are incurred by the taxing authorities in the assessment and collection of taxes.
Compliance costs:
Costs borne by individuals and companies in complying with tax regulations
Keep costs as low as possible
Economy in collection
Convenience in payment
